Withholding tax pushes banks’ tax payments to record Sh205.58 billion

A sharp rise in withholding tax collections helped Kenya’s banking industry deliver more than Sh200 billion in taxes for the first time in 2025, even as the amount paid directly by lenders declined and the cost of meeting tax obligations increased sharply.

The sector’s total tax contribution climbed to Sh205.58 billion from Sh194.81 billion in 2024, representing a 5.53 per cent increase, according to the Kenya Bankers Association’s Total Tax Contribution Report 2025.

The report covers 33 banks and microfinance institutions, which accounted for 96.9 per cent of the banking sector’s net assets and contributed about eight per cent of the government’s total receipts during the year.

A key finding was that taxes collected by financial institutions on behalf of the government exceeded the taxes they paid from their own resources for the first time since the study was introduced.

The institutions collected Sh107.22 billion on behalf of the government in 2025, up 13.24 per cent from Sh94.69 billion a year earlier. In contrast, taxes directly borne by the lenders fell by 1.77 per cent to Sh98.36 billion from Sh100.12 billion.

The Kenya Bankers Association said the higher collections came amid growing demands on institutions to meet their tax obligations.

“The Total Tax Contribution has been delivered within an increasingly demanding tax compliance environment. In 2025, banks made an average of 45 tax payments each month and devoted approximately 103 business hours per month to tax compliance activities,” said Kenya Bankers Association CEO Raimond Molenje.

Withholding tax was among the main drivers of the increase, with collections rising 29.4 per cent to Sh43.95 billion from Sh33.97 billion in 2024.

The growth elevated withholding tax to the second-largest source of the sector’s total tax contribution, overtaking taxes linked to employment.

Changes brought in under the Tax Laws (Amendment) Act, 2024, contributed to the increase by widening the definition of royalties and bringing more payments within the withholding tax framework.

Collections from withholding tax on royalties rose by 159 per cent, while those charged on professional fees increased by 292 per cent.

The rise in tax collected on professional fees was linked to greater expenditure by banks on core banking system upgrades and related technology infrastructure.

Withholding tax on interest payments also recorded growth of about nine per cent, supported by an expanding customer deposit base despite a reduction in funding costs.

Deposits held by customers across the banking sector increased by 9.9 per cent to Sh6.12 trillion in 2025. The larger deposit base created room for higher interest payments subject to withholding tax.

Corporate tax continued to account for the biggest share of taxes contributed by banks, although its growth was more modest than that of withholding tax.

Payments under this category increased by 2.06 per cent to Sh70.84 billion from Sh69.41 billion in 2024.

The increase came despite a 17.63 per cent rise in the sector’s profit before tax, with the report pointing to greater investment in government securities whose returns are exempt from tax.

The investments affected the proportion of banks’ earnings subject to corporate tax, helping explain why tax payments grew at a slower pace than profits.

Another factor behind the decline in taxes paid directly by lenders was the reduction in irrecoverable value added tax (VAT).

This tax, which banks cannot recover by offsetting it against output VAT, dropped by 10.64 per cent to Sh13.65 billion from Sh15.27 billion in the previous year.

Employment-related taxes moved in the opposite direction, rising by 6.4 per cent to Sh36.81 billion from Sh34.59 billion.

The category includes Pay As You Earn, employee contributions to the National Social Security Fund, the Affordable Housing Levy and deductions for the Social Health Insurance Fund.

The report attributed the increase partly to the full-year effect of housing levy and health insurance contributions, as well as higher NSSF contributions following revised rates introduced in February 2025.

Excise duty collected by banks also increased, reaching Sh23.90 billion compared with Sh22.66 billion in 2024, a rise of 5.46 per cent.

The report linked the improvement to a recovery in lending activity, which generally generates more transactions and increases fees charged for financial services.

Despite the growth in overall tax payments, the cost of complying with tax rules rose sharply for participating institutions.

The average annual compliance cost per institution increased by 62.25 per cent to Sh30.99 million in 2025, compared with Sh19.10 million the previous year.

The increase reflects the growing financial demands associated with meeting tax requirements as banks deal with more complex filing procedures and changes in legislation.

On average, each participating institution spent Sh20.22 million on external tax consultants, including tax advisers and advocates.

The spending covered professional support as banks worked through increasingly complicated tax filing requirements and changes to tax laws.

Overall, the findings point to a growing role for banks as tax collection agents for the government, with the increase in withholding tax helping lift the sector’s contribution to a record level. However, the decline in taxes paid directly by the institutions and the steep rise in compliance expenses show that the growth in total remittances did not translate into a similar increase across all tax categories.